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Chapter 7
7-1
Learning Objective 1
Contrast audit evidence with evidence used by other
professions.
EVIDENCE : any information used by the auditor to determine whether the
information being audited is stated in accordance with the established criteria.
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Nature of Evidence
The use of evidence is not unique to auditors
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Learning Objective 2
Identify the four audit evidence decisions that are needed to
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Audit Program
It includes a list of the audit procedures
the auditor considers necessary.
Sample sizes
Items to select
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Learning Objective 3
Specify the characteristics that determine the persuasiveness
of evidence.
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Persuasiveness of Evidence
Appropriateness
is a measure of the quality of evidence, meaning its relevance and reliability
in meeting audit objectives
selecting audit procedures that Are relevant to the audit objective that the
auditor is testing
when the auditor traced from the duplicate sales invoices to related shipping documents,
the evidence was relevant for the occurrence transaction objective
tracing from shipping documents to sales invoices, the auditor can determine
whether shipments have been billed to customers. Relevant for completeness
Sufficiency
The quantity of evidence obtained determines its sufficiency.
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1. Independence of provider
Evidence obtained from a source outside the entity is more reliable than
that obtained from within.
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4.
5. Degree of objectivity
Objective evidence is more reliable than evidence that requires considerable
judgment to determine whether it is correct.
the qualifications ofthe person providing the evidence in subjective evidence.
6.
Timeliness
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Learning Objective 4
Identify and apply the eight types of evidence used in auditing.
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3. Documentation
4. Analytical procedures
5. Inquiries of the client
6. Recalculation
7. Reperformance
8. Observation
2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley
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Physical Examination
the most reliable and useful types of audit evidence
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Confirmation
the receipt of a direct written response from a third party verifying the accuracy of
information that was requested by the auditor.
Information
Source
Assets
Cash in bank
Marketable securities
Accounts receivable
Notes receivable
Owned inventory out on consignment
Inventory held in public warehouses
Cash surrender value of life insurance
Bank
Customer
Maker
Consignee
Public warehouse
Insurance company
Investment custodian
they are a highly regarded and often-used type of evidence . most costly
2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley
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Confirmation
Information
Source
Liabilities
Accounts payable
Notes payable
Advances from customers
Mortgages payable
Bonds payable
Creditor
Lender
Customer
Mortgagor
Bondholder
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Confirmation
Information
Source
Owners Equity
Shares outstanding
Registrar and
transfer agent
Other Information
Insurance coverage
Contingent liabilities
Bond indenture agreements
Collateral held by creditors
2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley
Insurance company
Bank, lender, and
clients legal counsel
Bond holder
Creditor
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Documentation
It is the auditors inspection of the
Internal
documents
External
documents
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Internal document has been prepared and used within the client s
organization and is retained without ever going to an outside party.
Internal documents include duplicate sales invoices, employees time reports,
and inventory receiving reports
External document has been handled by someone outside the client s organization
who is a party to the transaction being documented, but which are either currently
held by the client or readily accessible
vendors invoices, cancelled notes payable, and insurance policies
External one is more reliable than Internal documents
Internal documents created and processed under effective internal control is more
reliable than conditions of weak internal control
Original documents are considered more reliable than photocopies or
facsimiles.
When auditors use documentation to support recorded transactions or amounts, the
process is often called vouching
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Analytical Procedures
use comparisons and relationships to assess whether account balances or
other data appear reasonable compared to the auditor s expectations.
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Recalculation
It involves rechecking a sample of calculations
made by the client.
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Reperformance
It is the auditors independent tests of client
accounting procedures or controls that
were originally done.
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Observation
It is the use of the senses to assess client activities.
The auditor may tour the plant to obtain a general
impression of the clients facilities.
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Objectivity of evidence
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Type of Evidence
Audit Procedure
Sample Size
Items to Select
Timing
Observation
Not applicable
Balance
sheet date
Physical examination
Count a sample of
inventory and compare
quantity and description
to clients counts
120 items
40 items with
large dollar
value, plus 80
randomly
selected
Balance
sheet date
Documentation
Compare quantity on
clients perpetual records
to quantity on clients
counts
70 items
Balance
sheet date
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Type of Evidence
Examine
Scan
Read
Compute
Recompute
Foot
Trace
Compare
Count
Observe
Inquire
Vouch
Documentation
Analytical procedures
Documentation
Analytical procedures
Recalculation
Recalculation
Documentation/Reperformance
Documentation
Physical examination
Observation
Inquiries of client
Documentation
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Learning Objective 5
Understand the purposes of audit documentation. worki ng papers
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Audit Documentation
Audit documentation is the principal record
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Audit Documentation
Purposes of audit documentation
A Basis for Planning the Audit
A Record of the Evidence Accumulated and the Results of the Tests
Data for Determining the Proper Type of Audit Report
A Basis for Review by Supervisors and Partners T
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Sarbanes-Oxley Act
The Sarbanes-Oxley Act requires auditors of
public companies to prepare and maintain
audit working papers for a period of no
less than seven years.
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Learning Objective 6
Prepare organized audit documentation.
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Robinson Associates
Trial Balance
12/31/09
Cash
Accounts Receivable
Prepaid Insurance
Interest Receivable
$165,237
275,050
37,795
20,493
Financial Statements
and Audit
Report
Financial
Statements
and Audit
Report
Working
Trial
Balance
Financial
Statements
and Audit
ReportJournal
Adjusting
Entries
Financial
Statements
and AuditContingent
Report
Liabilities
Financial
Statements
and Audit Report
Operations
Financial Statements
and Audit Liabilities
Report
and Equity
Financial
Statements
and Audit Report
Assets
Financial Statements
and Audit Report
Analytical
Procedures
Financial
Statements
and
Audit
Report
Tests of Controls and
Substantive
TOT
Financial
Statements
and
Audit
Report
Internal
Control
Financial
Statements
and
Audit
General Report
Information
Financial
Statements
and
Audit
Report
Audit
Programs
Financial
Statements
and Audit Report
Permanent Files
Financial Statements
and Audit Report
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Permanent Files
These files are intended to contain
data of a historical or continuing
nature pertinent to the current audit.
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Current Files
include all audit documentation applicable to the year under audit.
Audit program
General information
Supporting schedules
schedules prepared by the client or the auditors in support of specific amounts
on the financial statements
2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley
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Learning Objective 7
Describe how technology affects audit evidence and audit
documentation.
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Effect of Technology
Audit evidence is increasingly in electronic form
Auditors must evaluate how electronic information
affects their ability to gather evidence
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